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Monday, August 18, 2008

India-U.S. nuclear deal in focus again

The India-U.S. nuclear deal is all set to raise investor hackles for the second time in less than a month as it comes under the scanner of the Nuclear Suppliers Group this week in Austria.

And blue-chips such as NTPC, Bharat Heavy Electricals and Larsen & Toubro -- which stand to benefit from an approval -- could be in for some volatile trading.

Getting the 45-nation group to lift a ban on exports of nuclear fuel and technology to India will be every bit as difficult for New Delhi as it was to win a confidence vote in the Parliament over the same agreement last month. Perhaps even more so.

Unlike the Indian Parliament, where a simple majority was sufficient for the ruling coalition to win the vote and avoid early elections, India needs to make sure that none of the NSG's 45 members block the agreement. It isn't going to be easy, as India hasn't signed the nuclear Non-Proliferation Treaty.

Local media has reported that although a majority of the countries are either in favor of the deal or neutral, some countries such as Austria and New Zealand, as well as non-government organizations, aren't comfortable with making an exemption for India, fearing such a move could undermine non-proliferation efforts.

While Indian ministers and bureaucrats are on diplomatic overdrive to win over the group members, the outcome is by no means certain and will likely keep investors on tenterhooks.

The importance of nuclear energy to India can't be overemphasized. Millions of people in rural India still live in the Stone Age, with no electricity at all. Even in major cities, power outages of several hours a day are becoming commonplace, especially in summer.

With limited coal reserves and insufficient supplies of natural gas and other fuels, nuclear energy is potentially the brightest hope to boost the country's power-generation capacity, as well as dependence on cleaner fuels.

Needless to say, the huge power deficit translates into an equally big opportunity for not just nuclear power specialists in the developed world, but also the entire power chain in India, comprising utilities such as NTPC, equipment suppliers such as Bharat Heavy and engineering and construction majors like L&T and Hindustan Construction, which are keen on a major presence in the nuclear-energy segment.

In a rally that began shortly before the parliamentary vote on July 22, both the power and capital goods indexes on the Bombay Stock Exchange have risen at least 15% to comfortably outperform the 30-stock benchmark Sensex. The advance suggests the market may have already priced in some amount of upside in anticipation that the nuclear agreement will sail through. At least some of those gains could come off if U.S. and Indian diplomacy fails this week.

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